Risk & Business Magazine Lovitt & Touché Fall 2015 - Page 10

Like the tradeoffs between the balance sheet and the P&L; it’s this reputation/ productivity balance that is the essence of business. We want to make our customers, employees, and shareholders increasingly happier, which should lead to a more valuable company; but we can’t give away the store in the process. “We want to make our customers, employees, and shareholders increasingly happier, which should lead to a more valuable company; but we can’t give away the store in the process.” this one), etc. In turn, the customer group represents all those who pay you. After you subtract one from the other, what’s left over, hopefully, is some cash to pay back the bank, investors, and the owners. It greatly simplifies how you view a balance sheet if you look at it through this three-stakeholder lens. If you think about the balance sheet, it lists a bunch of people and organizations with whom your business has a monetary relationship, telling you who owes who and what cash, if any, remains – hopefully a significant amount of cash(flow) if you’ve structured the business model correctly! Process/Activities These three groups of people, in any business, are then engaged in only three main activities or processes: making or buying stuff; selling it; and keeping track of the transactions. I refer to this as the “process” or “activity” side of the business where the focus is on doing things better, faster, and cheaper (less costly, for those that cringe when they hear the word “cheap”). It’s these three fundamental activities that determine the profitability of the business. Simply put, making and buying stuff generates costs. In turn, selling this stuff generates revenue. And, again, if you’ve structure the business model correctly, you’ll have quite a bit of profit left over when you subtract one from the other. “Simply put, making and buying stuff generates costs. In turn, selling this stuff generates revenue.” Like with the balance sheet, this triumvirate of basic processes provides you a greatly simplified lens throu